The manufacturing sector is showing signs of life, but cost pressures remain

Australian manufacturers have had a few better months for new orders, and tax cuts should help recover household incomes and underpin healthier demand for goods.

Demand rebounded in the June quarter, with a net 20% of companies seeing an increase in new orders.

This comes after new orders stagnated in the second half of 2023 and then fell earlier this year as retailers struggled to move inventory due to higher interest rates and pricing pressures weighing on consumers.

Westpac economist Ryan Wells said conditions were improving in the manufacturing sector survey, highlighted by a quarterly survey by a major bank and the Australian Chamber of Commerce and Industry.

“The broader economic environment for manufacturers has been challenging over the past year, highlighted by a slowdown in new order growth,” Wells said.

The tax cuts, scheduled to begin on July 1, should help support household incomes and sustain a demand recovery in the second half of 2024.

However, manufacturers have not recovered, and the study showed persistent labor shortages and still “sharp” cost pressures.

A net 71% of companies reported an increase in average unit costs, which was the highest since the December 2022 peak.

Inflation peaked at the end of this year, rising 7.8% annually, and has since fallen to 3.6% in the 12 months to March.

Despite progress in consumer price growth, it remains above the two to three per cent range targeted by the Reserve Bank of Australia (RBA).

After weakening convincingly in the second half of 2023, a slowing in inflation progress raised concerns for the central bank at last week’s interest rate meeting.

While interest rates were unchanged at 4.35% at its June meeting, economists say the RBA board will need to be more confident that inflation will return to target before it starts cutting rates.

The Australian Bureau of Statistics is due to provide an inflation update for May on Wednesday.

Commonwealth Bank economists predicted that the annual growth rate would rise again during the month due to unfavorable base effects, but the result would be weaker on a monthly basis.

Inflation data in May should be lower by 0.3% on a monthly basis, but rise to 3.7% from 3.6% as forecast.

This article was first published by AAP.

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